The secondary headline, or whatever the line under the title is called, promised to offer a savings formula. Ok, I thought, lets see where this goes. The "formula" was to save at least 5% of your income if you are 40 years old but make sure you get it up to 10% per year by the time you are 45.
This struck me as a little light so I decided to run the numbers and see how the idea plays out. In the past I have seen articles estimate the average 401k balance ranging from, if memory serves, $47,000 to $86,000. So I assumed that a 40 year old has accumulated $86,000 which unfortunately is probably a generous assumption. If this person makes $100,000 per year and starts out saving the full 10% and averaged 5% portfolio growth per year, I gave him the unrealistic benefit of putting all $10,000 into the 401k on the first day of the year but did not assume any pay raises (I did not want to make a whole day of this), at age 65 this person would have $792,358.Another flaw in the numbers is the overly linear assumption of a 5% return every year. Over a 25% year period there would be 2-4 bear markets and a few years like 2009.
Using the 4% rule, the portfolio at that point would generate $31,694 per year. Do you agree that something will have to give? I don't know how difficult it is to start saving 10% but it is difficult to see where relying on the advice in the article will work out. It could work out, the returns could average 10% per year instead of 5% which would make for a much bigger number but relying on saving just 10% and getting 10% returns sounds like a very bad idea.
There are three things that could give but only one has to. If he lives way below his means now he would have a better chance of the $792,000 being enough, of course if he lived way below his means he could probably save more than 10%. If he lives at his means now he could make changes along the lines of downsizing, essentially living a lesser lifestyle upon retirement or he could work, one way or another, past age 65. I suppose a fourth option would be to live in denial, spend the same way and worry about it later. Trust me, trust me, people do this.
With regard to Social Security I usually say I am not planning on it being there. This is a very benign way to not really deal with it but candidly I can't figure how it continues to pay out in the future in any way that looks anything like what we know today. Regardless of when you think it starts to take in less than it pays out or what projected date you think it goes bust it just does not add up to me. This stands to be some harsh reality for a bunch of people, maybe people who today are aged 35-55, especially those folks who have not been able (either for lack of diligence or income) to set aside some money.
In this week's Economic Beat in Barron's Gene Esptein cited a paper by BLS that talked about the supply of job openings increasing dramatically in 2018 as the oldest of the baby boomers turn 72. The article implied that many of these jobs may not be desirable as a big chunk of them will be blue collar-ish jobs but a point I have made often and will continue to make is that this is a problem that requires innovative solutions and a willingness to think about things differently.
I also think that job providers will think differently about how to fill these positions. I'm sure you've read about companies doing this already. It is reasonable that the typical 67 year old would not want or need to work 40 hours per week but if prospective employers realize this, offer 15-25 hour schedules it hopefully creates a win-win. If the labor force evolves the job market will have to evolve with it.
Personally, we save more in a year than we have to spend in a year per our current expenses and I hope to do what I do work wise until the end.
The picture is our neighbor's very old Jeep pickup. We've had quite a bit of snow this week.
6 comments:
Roger,
I agree that one should save as much as possible. If one starts early one can live on the dividends/interest and save more than 10%. However there other things to have at late age. Let me explain. I think that to be in the late age alone is not such a good think. Look at Howard Hughes. It was sad in a human and emotional level that he was all alone. A gost. Doing things productive with people that you like to be around is the best way to get older. It might be your partner, your kids, people/friends that satisfy you mentally and emotionally. Plan the financial, the emotional and human side as well.
Best,
Jeff from Milan, Italy
I think you need to save at least 15% to a 401k or the max allowed. Additionally, I think you need to save 10 to 20% of whats left if possible. It was not possible after I purchased my first house. Still I think it is a reasonable goal.
Roger:
I have been following your blog for years and this post nailed me -- about $750K in my IRA, 58 years old and semi-retired.
Fortunately, I will have a 25 year retirement -- when I choose to take it and have other investments.
That said, my wife and I have taken a similar track this year as you suggest. She is in real estate and works about 20 to 30 hours a week and I own my own business and work three days a week in a job that I love. Beats sitting on your butt and beats working full time. Sure, I do not make over 100K anymore, but 35 to 40K for 3 days a week works for me. Additionally, my IRA continues to get larger and I do not project a need to withdraw money for many, many years.
Keep up the good work.
Richard
Think social security will be there for you after paying in for 30-40 years. It probably will be, but probably not in the amount you anticipate. According to the official CPI used by SS, the cost of a car rose only from $6,847 in 1979 to $11,708 in 2004 (the actual cost rose from $6,847 in 1979 to $27,940 in 2004). How can that be? Hedonic adjustments. As a product is "improved" from year to year, the increase in price allotted to the improvement (whether the buyer wants the improvement or not) is not included in the increase in price. Great game the gov't has going there for reducing future SS costs without even voting. Here is a link to an article that explains this much better than I can:
http://dailyreckoning.com/economists-serving-their-political-masters/
Not sure, but this is probably used by the gov't to calculate the inflation portion of the return for those inflation-protected bonds.
Roger,
My comment doesn't relate all that much to your post today, but I think a lot of people will find the topic interesting. Do you think it makes sense for a retired person to be 100% invested in the stock market, provided he/she can live comfortably on ~4% of their liquid net worth? Conventional wisdom seems to say that a person's asset allocation ought to skew increasingly towards fixed-income as they age. For instance, Bogle says that allocation to stocks should equal 100% - age (e.g., 40-year old should have 40% in fixed-income and 60% in stocks). But that doesn't make much sense to me. In my opinion, it's crucial to determine whether or not you have enough money to live off of your "interest". I put "interest" in quotes, because I don't mean literal interest (or dividends). I mean total investment return, which equals interest+dividends+capital_gains. I think that if you can live off of a *conservative estimate* of your long-term investment returns, then it's ok to be fully exposed to equity market fluctuations. In other words, if you have enough money so that you only need to withdraw about 4% from your account each year, then you're unlikely to be forced into selling too much stock at the wrong time (i.e., after a steep market decline). And as long as you can live off of your (long-term average) "interest", then your "principal" lasts forever and can eventually be passed on to your kids. Of course, inflation must be taken into account in this calculation. If you assume an average inflation rate of about 2.5% per year, and that you need to withdraw about 4% per year to live on, then your long-term investment return has to be at least 6.5% per year (that allows your "principal" to grow at the rate of inflation, which is necessary in order for your real wealth to stay constant). I'd be intersted to know if other people view things this way. I've never really seen it analyzed like this before.
Thanks,
AAG
i have written about this before. the idea that everyone can rely on 100-your age to figure asset allocation makes no sense to me. to repeat myself if you are 60 and either or both of your parents are alive (or made it to at least 90) you need to plan on being around a long time. Assuming inflation rates of the past 20 years or so our expenses will go up by 50% in 15 years. if you are likely long lived how much do you want in bonds? if you only need a 1% withdrawal rate then maybe a lot in bonds makes sense.
as far as your numbers yes they are reasonable but i would remind that markets cannot be that linear. your average may work out but it will be a lumpy road to that average.
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